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SHOW NOTES FOR EPISODE 192: ASK BILL! NEWBIE 1ST PURCHASE, OUT-OF-COUNTRY INVESTING & COACHING/MENTORING PROGRAMS,
Ask Bill! Newbies are nervous about their first rental property purchase. A recent college grad from Canada who wants to be a real estate investor asks about investing in the U.S. Another person asks about coaching and mentoring programs. In this Fun Fact Friday “Ask Bill!” episode, Bill Manassero answers some of the real estate investing questions received during the month from emails, in-person conversations, phone calls or through online portals such as BiggerPockets.com and Quora.
Question #1 – Newbie Investors Have Concerns About First Purchase
Hi Bill,
My husband just turned 55 and I am 53. We are ready to close a deal with [a turn-key provider] for our first property and I keep second guessing myself. We are paying cash and I’m not sure that was the best idea. But, I can’t change that. I think our next property will be closer to home. My husband is a contractor and would like to do the work to fix up our next place. I can’t seem to wrap my head around how buying properties with leverage is going to benefit us. As long as we always have some cash flow after paying the mortgage and all expenses it’s good. We should use any extra money to pay the debts down so in 10 years or so we’ll have debt paid down and have more cash flow to use for living?? Then when we want to retire and use the cash flow, it’s ok to have all of that leverage….ah I just need a simple explanation for what seems complicated to me. Can you direct me to a resource that will help me?
Thanks so much!!
Laura
Bill’s Answer to Question #1
Laura,
Thank you for your email. This is a great question (or more, series of questions) that I think many newbies struggle with. There’s a lot of meat here and I’ll try to hit it all!
First, congratulations on your first investment property! You did it! Great work!
Here are the questions or concerns in your email:
- Not sure if paying cash upfront for a property was the best decision
- Husband is a contractor, want to use his skills on next project
- Can’t see how buying with leverage can benefit you
- Want to pay down mortgages as soon as possible before retirement
- Need simple explanation
- Wants a resource that can help you
Buying your first investment property can always be a little bit scary. I’ll get more in to that in a minute, but first, I like to address a key thing that I think will help you. My question to you is this, “Why are you investing I real estate in the first place?
It sounds like one key reason is that you want to generate cash flow for retirement. But that may be a little vague.
What is really, really, really important is that you “Know Your Why Before You Buy.” I’ll repeat that – “Know Your Why Before You Buy” (write that down). Fully understanding the real reasons behind your decision to invest in real estate in the first place ifs critical. When you fully understand your “Why”…
- This will do a lot to reduce the fear and/or anxiety
- If you know your why, you should have confidence in your rental property purchases
- Take the time to identify your why – What is your motivation for getting involved in real estate investing in the first place? Try to understand the prime motivation – not just “some extra cash for retirement.” (see our podcast episode #122 – Importance of Knowing Your Why.)
- Once you know your why, you can start to define your “how” – which outlines in detail exactly how you are going to achieve your why and how long it will take – how you are going to get there is mapped out in your real estate investing strategic plan. This is a document that will help guide and direct your efforts so you don’t waste precious resources just “buying a bunch of rental properties” and hoping it makes our retirement years better. It is very specific. (see #166 – Writing Your 2018 Strategic Plan).
- So, if for example, part of your goal it to acquire five houses to generate an additional 1,000 dollars in monthly cash flow income for your retirement, you have already work backwards from your goal to map out specifically how you will get there and over what period of time.
Know that:
- We all are a bit scared on our first investment.
- It’s perfectly normal
- We fear losing our hard earned money – and that’s a healthy fear to have
- You need to carefully assess every purchase – that shouldn’t change with experience – always do the proper due diligence and always make sure you buy right
- Everything’s new to you but that’s just a temporary thing
- Soon, it will all be “old hat”
- This is REALLY where the true education begins – AFTER your first purchase – It’s here that you really start learning. It’s a good thing!
- Because what you learn from here on out is “real life” – not just theory
- You’ll be able to use and apply the things you learn from this stage on to make even better purchases and decisions in the future
- Each property after this gets easier, and after the next, even easier, and so forth
- Don’t let fear get a foothold
- You will make mistakes – everyone does!
- Don’t be afraid of mistakes
- Embrace each mistake as part of your “Harvard degree” on real estate investing
Also, there are some advantages of turn-key (even though I’m not the biggest fan of turn-key)
- For newbies, such as myself when I started, it was the easiest way for me to jump in (all rehabbed, new tenants, property manager already in place – now that won’t always be a good thing – but for a newbie starting out, there’s less to worry about
- Don’t have to worry about adding rehab/repairs, finding tentants, finding a property manager to your list of things to deal with
- You can jump into learning how to be a landlord (dealing with property managers, tenants, expenses, managing your new “business” – and it is a business – right from the get go)
- Working with a turn-key provider can actually help reduce some of the first-time buyer anxiety. That’s what I did for my first 4 properties. However, you may pay for it later on. The extra cost of a turn-key can also be worth it for the “reduced anxiety.”
- As you start to feel more comfortable as a landlord and investor, you can start to venture out and search for better deals without the third-party!
Now, let’s address some of your key concerns:
#1 Not sure if paying cash upfront for a property was the best decision
- That’s not a bad thing. I did that with my first three properties and I’m not saying because I did that it’s the best approach. I’m just saying it worked for me!
- Some of the positives:
- First off, you’ll get more cash flow right away
- Your property will be like a bank account that’s accumulating interest (that’s the equity that’s hopefully growing over time) until you need it.
- When you need it – now this is the beauty of leverage in real estate investing – you can do a cash-out re-fi
- You can then just take money out of your “rental property savings account” to purchase another property or two.
- Sure you will have a mortgage and your cash flow will be reduced but you can acquire one, two or maybe three more properties with mortgages that will also be generating cash flow
- This is what I did with my first three. Two years later, I was able to pull enough equity out of those properties for a down payment and repairs on a 22-unit apartment AND I got the added tax advantage of the new mortgages – Oh, the beauty of leverage
- Some of the positives:
3. Can’t see how buying with leverage can benefit you
- Leverage helps you grow your portfolio quickly
- Once you reach your goal (for example, five houses), you can start directing your cash flow and any other funds you have toward paying down the mortgages until you retire.
- For example, if you buy an investment property using a bank loan, you will enjoy a high degree of leverage. Let’s assume your property costs $200,000, and you put in a down payment of 25%. That means that you’ve paid $50,000 in cash, and asked the bank to finance the rest. What’s great about real estate investing is that the minute you own the property, you are free to rent, sell, flip, etc. So if you rent out the property, the income you receive pay your mortgage and generate additional cash flow after expenses and PITI. If you sell the property at let’s say $250,000, you’ll be making 100% return on your investment (not even counting the cash flow you’ve already earned).
- Or, if, for example, you invest that same $50,000 in 5 houses at $40,000 each (putting 25% or $10,000 down on each) and, assuming the houses will bring in $850 per month in income minus You can also invest in multiple properties at a time, enjoy the leverage, and increase your overall net income and net wealth!
- Add to that the tax advantages of the depreciation, applicable expense deductions and mortgage interest deduction)
- That’s just a few examples of how real estate can use leverage to your benefit.
#2 Husband is a contractor, want to use his skills on next project
Now, you personally have an advantage in that your husband is a contractor. That’s fantastic! That means, if you can find properties close to home, you should be able to find some really great deals that may scare away other investors because of the repairs required.
In fact, I know one investor who purposely seeks out those “red flag” properties that most investors run the other way on. Sometimes, when investors hear things like “foundation issues or problems” or statements like “will require major mechanicals re-do” or selling “as-is” they run the other way but that’s also a source of great deals – if you know what you’re doing and know how to make the right repairs. The investor I know, has found that those “foundation issues” that supposed to cost 10s of thousands to repair, well, only took a few thousands.
4. Extra money to pay down the mortgages
- Great strategy (what I call the Dave Ramsey approach)
- Make that part of your plan
- Do the math and build that into your strategic plan so that your mortgages are paid off (or close to paid off) by the time you retire.
- Once retired, you won’t need the tax breaks coming from the mortgages (you’ll still have depreciation and legitimate expense reductions) and the advantages of increased cash flow
#6 Referral for a resource to help answer my questions.
My number one choice and the one that helped me the most when I got started AND it’s FREE! — BiggerPockets.com
- Get online and join
- Get in the Forums and read, looking ip topics and ask questions of your own
- Meet fellow investors and possible mentors
Well, I hope that helped!
Question #2 – Interested in Real Estate Investing and Investing Out-of-Country
My name is Sammy I’m 22 years old, so I guess I’m not even close to being an old dawg but I stumbled upon your podcast a couple weeks ago and have been hooked ever since and can’t get enough of the excellent content you put out, so I firstly wanted to thank you for giving back to the REI community. I currently live in Toronto, Canada I just graduated from college with a degree in business. It wasn’t until about 3 months ago when I discovered the power of investing in multi family complex’s and I have since had a burning desire to begin the journey of purchasing one. I wanted to ask you what advice you would give to someone at my age who is looking to pursue this journey. I would definitely need to syndicate a property if I found a good deal. The current market for multi family in Toronto is horrible (property’s are insanely expensive, and even about 3 hours away from the heart of Toronto, a 16 unit property can go for around 3 million and they are nothing special at all) I would love to venture off into the states and tap in to some markets there eventually. But right now what would you recommend I do. I’m looking for jobs in the real estate field (such as risk analyst for big companies) so I can at least make some money and get some knowledge of the industry. Your feedback would help me a ton and I really appreciate it! Thanks a ton!
Bill’s Answer to Question #2
Sammy,
Great question! And congratulations! You figured it out BEFORE you got strapped into a 9-to-5 cubicle for 20 years!
Real estate investing really is a fantastic move for you, especially starting out young. Also, starting with multifamily is even better! Multifamily investing can yield significant returns early on. We have a bunch of podcasts on getting started, but I would recommend listening to #006 – How to Get Started in Real Estate Investing as a primer as you plan your career.
You mentioned getting started with syndication and perhaps you don’t have to so early on and here’s why:
- There are plenty of small affordable multifamily properties in the U.S. (I bought a duplex in Indianapolis for $50,000) that you can purchase for $10,000 and more. If I can do it, anyone can do it.
- As you look to bigger properties you can also look at creative financing alternatives.
- Even if you want to go for bigger apartments, you can get creative with seller financing, for example. See podcast #001 with Joe Fairless. He had a master lease (like a lease option but for apartments) for his first multifamily, a 168-unit apartment building in Cincinnati, Ohio and it didn’t require syndication.
- Sure, as you get into 100 plus units, syndication may be the most practical but you can also do things like Joint Ventures or Limited Partnerships too.
I don’t know Canadian law but I would recommend finding good real estate attorneys both in Canada and the U.S. to advise you accordingly.
Keep me updated on how things go. Maybe I can have you as a guest after you close on your first big deal!
Thanks for listening to the podcast and for writing.
Best,
bill
Question #3 – Coaching and Mentoring Programs
Hello, I appreciate the podcasts. Do you offer training, I mean besides all the podcasts. I have been looking for training. The problem for me at the moment is the resources. Some of the training is extremely expensive. There is an attorney whose fee is like $700 monthly which I am sure its good but again outside my current ability. I would appreciate suggestions if your time allows. Maybe you know some old dawgs that can help a fellow dawg? Thank you again for the podcasts and all your show notes.
Bill’s Answer to Question #3
Raphael,
Thanks for your excellent question! In fact, I would like your permission to air your question on this Friday’s “Ask Bill!” podcast. I think it would help a lot of people. Do I have your permission? Of course, I won’t share your last name and email.
I understand your dilemma. When I first started in real estate investing, trying to get help, it would always lead me to someone’s program that would cost me a ton of money. That’s why I started the blog and podcast. I wanted to offer information in an environment and in a way so that people don’t feel they’re always going to be sold something.
I personally don’t do training/coaching/mentoring. I would love to but time just doesn’t allow me the opportunity to do so with the quality I would want.
I do know some good mentoring programs that I can recommend and I’m in the process of developing a page on our Old Dawg’s REI Network website that will list some of these programs and their price. I hope to have it up in the next 30 days.
I would also recommend that you first try to find a mentor in your area that does not charge. I have a few episodes that share how to find a mentor and how you can do this without having to pay. One of my favorites is the one with Paul Moore #069 – The Importance of Finding a Mentor. He shares some great tips on how to find a mentor.
Well, I hope that helps.
Best,
bill
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